Venture Capital Glossary

AcquisitionThe act of one company taking over controlling interest in another company. Investors often look for companies that are likely acquisition candidates, because the acquiring firms are often willing to pay a premium to the market price for the shares.

Angel InvestorsIndividuals that provide venture capital to seed or early stage companies.. Business angels can usually add value through their contacts and expertise.

BenchmarksBenchmarks are performance goals against which a company's success is measured. Often, they are used by investors to help determine whether a company will receive additional funding or whether management will receive extra stock. Sometimes management will agree to issue more stock to its investors if the company does not meet its benchmarks, thus compensating the investor for the delay of his return.

Bridge LoansBridge Loans are short-term financing agreements that fund a company's operations until it can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.

BuyoutFunds provided to enable an enterprise to acquire another enterprise or product line or business.

Capital GainWhen an investor sells a stock, bond or mutual fund at a higher price than he or she paid for it.

Capital Under ManagementThe amount of capital available to a management team for venture investments.

ClosingThe final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.

Corporate VenturingThe practice of a large company taking a minority equity position in a smaller company in a related field.

Debt FinancingMoney that business owners must pay back with interest. There are myriad types of debt financing, from simple commercial loans to bridge/swing loans in which a lender makes a short-term loan in anticipation of equity financing at a later stage in the development of a business.

Due DiligenceThe investigation and evaluation of a management team's characteristics, investment philosophy, and terms and conditions prior to committing capital to the fund.

Equity FinancingSelling an interest in your business to an outside party to raise money.

Equity OfferingsRaising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock.

Executive SummaryExecutive Summary refers to a synopsis of the key points of a business plan.

ExitThe sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.

Exit RouteThe method by which an investor will realize an investment.

Follow-OnA subsequent investment made by an investor who has made a previous investment in the company -- generally a later stage investment in comparison to the initial investment.

Fund Of FundsAn investment vehicle designed to invest in a diversified group of investment funds.

IPO (Initial Public Offering)Issue of shares of a company to the public by the company (directly) for the first time.

IRRCompound Internal Rate of Return.

Lead InvestorThe investor who leads a group of investors into an investment. Usually one venture capitalist will be the lead investor when a group of venture capitalists invest in a single business

Leveraged Buy-out (LBO)An acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business.

Limited PartnershipsThe legal structure used by most venture and private equity funds. Usually fixed life investment vehicles. The general partner or management firm manages the partnership using policy laid down in a Partnership Agreement. The Agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.

LiquidationThe sale of the assets of a portfolio company to one or more acquisition firms when venture capital investors receive some of the proceeds of the sale.

Lock-Up PeriodThe period an investor must wait before selling or trading company shares subsequent to an exit -- usually in an initial public offering the lock-up period is determined by the underwriters.

Management Buy-in (MBI)Purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.

Management Buy-out (MBO)Funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.

Mezzanine FinancingFinancing for a company expecting to go public usually within 6 –12 months; usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.

Minority Enterprise Small Business Investment Companies (MESBICS)MESBICs (Minority Enterprise Small Business Investment Companies) are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group or persons recognized by the rules that govern MESBICs to be "economically disadvantaged."

PIPEPrivate Investment in Public Equity.

Portfolio CompanyThe company or entity into which a fund invests directly.

Private EquityPrivate equities are equity securities of companies that have not “gone public” (in other words, companies that have not listed their stock on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.

RecapitalizationThe reorganization of a company’s capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility.

Return On Investment (ROI)The internal rate of return on an investment.

Secondary Public OfferingThis refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets.

Secondary PurchasePurchase of stock in a company from a shareholder, rather than purchasing stock directly from the company.

Seed CapitalMoney used to purchase equity-based interest in a new or existing company. A venture capitalist's return usually comes from preferred stock, a share of profits, royalties or capital appreciation of common stock. Most venture capitalists look for companies with high growth potential.

Series A Preferred StockThe first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.

Small Business Investment Companies (SBIC)SBICs (Small Business Investment Companies) are lending and investment firms that are licensed by the federal government. The licensing enables them to borrow from the federal government to supplement the private funds of their investors. Some of these funds engage only in making loans to small businesses or invest only in specific industries. The majority, however, are organized to make venture capital investments in a wide variety of businesses.

SyndicationThe process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.

Term SheetA non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The Term Sheet is a template that is used to develop more detailed legal documents.

TurnaroundThis word is used to describe businesses that are in trouble and whose management will cause the business to become profitable so they are no longer in trouble.

Venture CapitalMoney used to purchase equity-based interest in a new or existing company. A venture capitalist's return usually comes from preferred stock, a share of profits, royalties or capital appreciation of common stock. Most venture capitalists look for companies with high growth potential.